Download Actuaries in the Capital Markets

Actuaries in the
B y R i c h a r d d e H a a n
Risk is the name of the game in the
capital markets, which is why actuaries
have their work cut out for them there.
ctuaries have traditionally focused on
relatively specific insurance-related
fields: life, health, property/casualty (P/C), and pensions. In these industry segments,
actuaries have played well-defined roles within their organizations, at both the corporate and business unit or operations levels. Given their skill set, it’s broadly agreed
that actuaries have succeeded by adding significantly to the financial and risk man-
Recently, the profession has sought ways to promote actuarial involvement in wider fields. Market
needs are pushing the envelope, challenging actuaries to expand into new and less traditional areas.
While there is no doubt actuaries will continue to
play their vital traditional role in the insurance industry, there is a fast-growing realization in other
financial services industries—particularly the capital markets—that actuaries can provide missing and
much-needed value.
Recent employment statistics indicate that
although the number of actuaries working for
employers in the capital markets has grown by 5
percent per year over the past five years, there are
only approximately 450 such actuaries, constituting
a relatively small 2 percent of actuarial membership.
While inroads have been made, the journey is just
beginning, and the career potential for actuaries in
nontraditional actuarial fields is significant.
Drivers of Change
Several internal and external drivers of change have
affected the actuarial profession over the past decade,
including increased compliance and regulations,
convergence of international accounting standards
across the financial services industry, and increased
recognition of companies’ risk management needs.
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No doubt new opportunities will continue reshaping
the profession. As these drivers bring other industries within range of the actuaries, the question is:
Can actuaries react quickly and demonstrate that
they can think outside the box and play meaningful
roles in these industries? Recent developments in
the capital markets seem to indicate that actuaries
are facing a time of change and approaching a period
of exciting opportunities.
To their credit, the leading actuarial professional
organizations—including the Society of Actuaries
(SOA), the Casualty Actuarial Society, the American Academy of Actuaries, the Canadian Institute
of Actuaries, the Institute and Faculty of Actuaries
in the United Kingdom, and others—have recognized the need for the profession to apply its
actuarial skills to a broader scope of work. These
organizations have launched initiatives to expand
the understanding of the business value of actuarial
experience, identify nontraditional actuarial career
paths, and map out new ways for actuaries to add
unique value to their organizations and clients in
the future.
The focus on change in the actuarial profession
is most recently demonstrated in the final report
issued by the American Academy of Actuaries’ task
force for the Critical Review of the U.S. Actuarial
Dave Cutler
agement expertise within insurance companies and pension funds.
Capital M
ark
ets
Contingencies | JUL/AUG.07 21
Actuarial Roles in Insurance
Mergers and Acquisitions
Insurance stock analyst
• Follows industry trends and listed insurance
companies.
• Works for investment bank or brokerage firm.
• Understands insurance market prospects and
competitive landscape.
• Actuarial skills used to analyze published
financials, review earnings guidance, and
evaluate prospective EPS.
Rating agency analyst
• Reviews ability of insurance companies to
meet obligations to policyholders, creditors,
and shareholders.
• Discusses prospects with company
management.
• Involved in rating new stock or debt issues.
• Understands insurance market and financial
reporting.
M&A banker
• Works for investment bank on insurance
company and insurance-related transactions.
• Analyzes actuarial appraisals used to support
purchase price and develop Purchase GAAP
financials.
• Uses actuarial skills in non-insurance deals to
look at balance sheet risk issues and future
asset performance.
Capital markets adviser—
insurance deals
• Works for institutions that are actively purchasing insurance companies or blocks of
insurance business, or setting up their own
reinsurance divisions.
• Gets involved in assessing deals as they
come in, post-deal integration of insurance
portfolios, and other actuarial areas like valuation, pricing, risk management, and financial
reporting.
22 Contingencies | JUL/AUG.07
Profession (CRUSAP). The CRUSAP team worked for almost
two years to identify risks and opportunities facing the American
actuarial profession and to make recommendations for both the
profession and individual actuaries to adapt to change and to
identify new opportunities.
This report, reviewed in the March/April 2007 Contingencies,
echoes the SOA and other organizations’ discussions about the
need for the gradual broadening of understanding by both businesses and actuaries on how the actuarial discipline can add value
to non-insurance-specific financial areas.
One of the obstacles to this goal is that current training has
not directly equipped actuaries to participate in non-insurance
industries, making it difficult for actuarial professionals to make a
case for meaningful participation. Success in these nontraditional
fields requires actuaries to demonstrate broad business acumen
and business communication skills as well as the ability to translate actuarial methodologies for other industries and to advocate
the value they can offer to the enterprise.
Profiles in Added Value
Over the past few years, the window of opportunity has been
slowly opening for actuaries in the capital markets as a result of
mergers and acquisition (M&A) transactions, securitizations, and
life settlements. As the capital markets continue to invest in the
insurance industry, new opportunities will flourish, allowing more
actuaries to migrate into mainstream capital markets activities.
At the risk of being predictive, the following are actuarial roles
that may become more common in the future:
➤ Insurance industry “expert.” Arguably driven by how enterprise risk management (ERM) has thus far affected the business
and investment worlds, there is a growing consensus that commercial and investment banks, brokerage, hedge funds, rating
agencies, and ultimately investors, will place increased importance
on understanding, quantifying, and clearly explaining their insurance-related investments as well as their insurance programs and
exposures. For example, these institutions need to understand, in
a post-Katrina world, the relative risks facing publicly traded P/C
insurers. Are all life companies equal in managing the potential
risks of pandemics?
➤ Insurance industry analyst. Actuaries have a unique perspective and comprehensive technical knowledge of insurance
products, pricing issues, and the risks insurers face at all levels.
That insight—applied to analysis and tracking of insurance industry trends, competitive landscape, and the fundamentals and
projected performance of specific companies—provides credibility and value to an investment bank’s or brokerage’s published
analysis and client guidance.
➤ Investment bank and M&A adviser. Investment banks have
traditionally advised on insurance transactions. More recently,
Actuarial Roles
in Insurance Securitizations
however, investment banks themselves have started purchasing
insurance companies or blocks of insurance business, or have
set up their own reinsurance divisions. Actuaries logically must
play a key role in performing due diligence on these deals and
determining the appropriate price to pay for the entity. They must
also provide their knowledge and experience to help manage and
extract value from the acquired insurance portfolio through active involvement in the post-deal integration process and overall
financial management.
➤ Life settlements adviser. While small today relative to traditional life insurance lines, a growing secondary market in life
insurance policies is attracting investment banks and hedge funds.
In addition to helping assess the inherent risks and pricing the life
settlement portfolios, actuaries are needed to monitor portfolios’
emerging experience, financial performance, and results.
➤ Rating agency analyst. For both insurance companies and investors, rating agencies play a key role in providing quantitative
and qualitative analysis of a company’s investment quality and
future performance. Actuarial involvement can be critical in assessing insurance companies’ ability to meet their obligations to
Securitization—investment bank
• Works on developing and marketing
alternative solutions.
• Develops financial deal models, serving as
liaison with insurance company’s consulting
actuaries and those working for financial
guarantor.
Securitization—financial guarantor
• Works on marketing a financial guarantor’s
expertise and services.
• Analyzes risks involved in particular deals,
liaising with consulting actuaries, investment
banks and rating agencies, or reviews deal
documents, and presents recommendations
to credit committee.
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Contingencies | JUL/AUG.07 23
Actuarial Roles in Non-Insurance
Capital Markets
• Works on assessing risk and modeling potential performance of varied non-insurance
assets.
• Participates in both internal executive management discussions of portfolio risk and
contributes to discussions with rating agencies
and market analysts.
policyholders, creditors, and shareholders. As industry best practices and regulations change, rating agencies are placing increased
importance on companies’ risk and risk management processes;
actuaries are ideally placed to assimilate these changes.
➤ Securitization adviser—investment bank. Over the past few
years, there has been significant growth in the insurance securitization market as investment banks have structured securities
to meet a need in the insurance industry—e.g., relief for excess
reserves under Regulations XXX and AXXX. As this market segment has grown, investment banks, rating agencies, and financial
guarantors involved in these deals have recruited actuaries to
model the cash flows and understand the underlying risks of the
securitized portfolios.
The potential for added actuarial value abounds in this high-
stakes securitization environment. As the capital markets become
more familiar with insurance-related risks, more wide-ranging
and actuarially complex deals are being contemplated. Being able
to identify, quantify, and clearly articulate the risks associated
with these structures will be keys to the range of insurance risks
ultimately securitized.
➤ Securitization adviser—financial guarantor. Financial guarantors or monoline companies insure the timely and eventual
repayment of bonds issued in a securitization. Actuarial involvement includes helping to market a financial guarantor’s expertise
and services; analyzing risks involved in particular deals; serving
as liaisons with consulting actuaries, investment banks, and rating
agencies; reviewing deal documents; and presenting recommendations to the credit committee.
Actuaries in Non-Insurance Capital Market Roles
Capital markets are recognizing the inherent investment appeal of
all kinds of insurance entities and products and will appreciate the
value actuaries can add as they continue this journey. This conflu-
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